Telling the Story of EGX Reform: Exclusive interview

CAIRO – 12 April 2018: Since he assumed his post as Chairman of the Egyptian Stock Exchange (EGX) last August, Mohamed Farid has embarked on some incremental reforms to the EGX in an attempt to deepen the country’s capital market with the aim of raising its contribution to the gross domestic product (GDP) by providing the required finance for enterprise to grow and implement their investment and expansion plans.

Thanks to the promotional campaigns and recent unprecedented economic reforms that took place in Egypt, foreign traders’ appetite for Egyptian stocks has been increasingly growing, registering a net purchase of LE 13 billion since the flotation, compared to LE 1.3 billion in the 14 months prior to launching the reform program in November 2016, Farid tells Business Today. “The beauty of this number is that it is diversified among several sectors: banking, non-banking, real estate, construction and pharmaceuticals,” he adds. “This, in itself, is a positive indicator. Trading activity also improved to record a daily average of LE 1.5 billion from LE 400 million per day, peaking some days to about LE 3.9 billion.”

The EGX is enhancing the trading environment by a number of measures that include having circuit breakers time for the first time since 2002, cancelling trading halts and widening price limits resulting from cash dividends distribution, in addition to allowing margin trading on Exchange Traded Funds (ETFs).

Farid talks to Business Today Egypt about implemented reforms, the increasing initial public offerings (IPO) and his overall outlook on the EGX. Before assuming his current position, Farid had served as the vice chairman of the EGX in 2010 and 2011, and then the chairman and CEPO of the think tank Dcode.

Egypt embarked on a bold economic reform pro-gram in November 2016. What was the impact of these reforms on the EGX?

We saw remarkable improvement in performance in 2017. Our benchmark index EGX30 was ranked first among Arab markets after soaring 22%, while the EGX70 and EGX 00 indices sky-rocketed 79% and 80%, respectively. The EGX was also the best performer globally since June 2013, according Morgan Stanley.

We arranged several promotional campaigns last year to restore confidence in the Egyptian market. Meetings were set with financial institutions and investment funds managing assets worth around $5 trillion based on a number of inter-national financial centers like London and New York, and during those meetings we reviewed the reform program’s latest developments and efforts to improve investment climate in Egypt.

Thanks to these reforms and promotional campaigns, foreign investors’ purchases in the EGX recorded a significant leap to reach LE 7.5 billion in 2017 and [a total of] LE 13 billion since November 2016 [compared to LE 1.3 billion in the 14 months prior to the float.]

Also in 2017, the EGX received more than 22,000 new investors, up from 17,000 investors a year earlier, marking an increase of 29%. Since the beginning of 2018, the EGX attracted around 6,800 new traders, with a daily average of about 100 traders during 66 trading sessions since the beginning of the year, excluding weekends and official holidays. We also attracted about 1,164 foreign institutions and funds last year, compared to 900 in 2016.

Another sign of the EGX’s remarkable performance in 2017 was reflected in the market capitalization which exceeded the LE 800 billion barrier for the first time since the global financial crisis in 2008, after it gained LE 200 billion.

How many listing proposals did you receive last year?

We received six IPOs with a total of LE 4 billion and foreigners’ participation exceeded 56%.

Over the past year, the EGX observed six IPOs with a total value of LE 4 billion, which is 65% higher than 2016. In these IPOs, we noticed significant rises in foreign participation, which amount-ed to more than 56% on average, in addition to oversubscription rates which hit 31 times in some of the IPOs.

What are the other indicators that benefitted from the reform program and the promotional campaigns?

Liquidity was a top gainer, with total value traded for the main market recording more than LE 296 billion, including LE 257 billion traded of stocks, marking an increase of 41% compared to 2016, and the fourth record in EGX history and the highest since 2009. On a daily basis, average daily trading edged up to LE 1 billion per day, compared to LE 741 million in the previous year.

On the supply side, the EGX saw remarkable improvement with total capital of newly listed companies surging during the year to above LE 2.4 billion, with an increase of 156% compared to last year through the listing of three companies. The EGX is to witness further improvement as the government move ahead with its public offering program for state-owned enterprises (SOEs).

Ongoing economic improvements and its positive outlook in the upcoming period was a main factor behind a 100% jump in capital increases last year, which witnessed the execution of 48 capital hikes worth a total of more than LE 10.4 billion.

What is the strategy you will adopt to deepen the market and attract new traders?

Since I became a manager at the EGX, we have been thinking about further activating the market and we usually get to analyze, given that the capital market is not only about trading, but is also about the companies that are listed with the free float associated with them, and the disclosures related to listed companies. The second aspect would be the intermediation aspect and introducing new trading mechanisms and financial instruments. This third pillar is the demand side; the number of investors, their types and how we can raise their awareness to achieve the financial inclusion targets and to have more participants in the market who can benefit on the long run from capital market activity. So, the strategy is tackling these three aspects of the capital market in Egypt in general; the supply side, intermediation and the demand side.

When you look at the first aspect of the supply side, it has three pillars, with the first associated with getting more companies to be listed on the EGX. We have been dealing with all business associations and have actually gotten requests from 15 private companies that want to be listed.

We are expecting four or six companies to be floated this year from the private sector. BPE is also going on the platform nowadays, and we have another financial operating entity that is expected [to float] in April. We have also been working with several other companies on the granular process of promoting and increasing the number of shares listed in the market.

So, rather than having a limited free-float, we are now increasing the required free-floated shares of companies by promoting the concept of adding more liquidity. We go on a granular basis and analyze company by company to know what is hindering the trading activity in that regard.

We then moved to improving the disclosures, and we are trying to encourage the listed companies to issue their disclosure in English as well as in Arabic, but it will take some time. It could be costly and tiring for them, but we are working on it. We have to find a certain methodology to achieve this target.

Chairman of EGX Mohamed Farid- Business Today/ Mohsen Allam

What about the progress made so far in promoting the electronic disclosure system?

The EGX has held a number of workshops for all listed companies to be trained for transit to the electronic disclosure system, and we have set a timeline for compliance of all listed companies to this system in the upcoming period. This system ensures efficiency in broadcasting information and data to ensure their immediate delivery to investors; the number of companies applying the electronic disclosure system reached 177 companies.

After that we will work on improving communications between listed companies, asset managers and brokerage companies by arranging a work-shop every two weeks between four listed companies with more than 50 asset management and brokerage companies on the other end. The companies represent their business plans, how they are generating revenues, and so on. This enables the asset manager to further understand the companies' business models and improves communication.

We have arranged periodic workshops with more than 42 companies until now and we have also created a special unit named “financial review” in the EGX, which is an unorthodox approach whereby we review all disclosures coming from the listed companies to assess if further disclosures are needed. It is not our role to intervene in anything associated with a company, but we intervene when it comes to lacking disclosures, items or financial information that have not been revealed.

The fourth item in the supply side is supporting SMEs through the NILEX market. Of course, we do request the listed companies to publish their disclosures regularly. The EGX met the nominated advisors of the SMEs stock market, NILEX, to urge them to be more committed to publishing studies and research papers for listed companies in this market. EGX’s management requested from nomads to work on marketing NILEX to encourage potential companies to become listed.

The second issue we are working on with these companies is helping them grow and transform from small enterprises to medium ones by introducing them to, and partnering with, some international financial donors such as the European Bank for Reconstruction and Development (EBRD), GIZ and many other donors, because these entities do provide services to the SMEs, including technical services, business plans and marketing strategies. Connecting these companies with such international entities will help create the transformation story of these companies. By creating these links, we are creating a platform…we are supporting these companies not only from the perspective of obtaining finance and improving their disclosures, but we are also supporting them from the perspective of day-to-day business to avail consulting firms to further help them.

What kind of efforts is the EGX expanding in the intermediation aspect? And what is your strategy to increase the trade volume?

We have been working on increasing the value of trading significantly, given the importance of having an active and deep capital market. One of the requests we have been receiving all the time from some foreign investors—who have the appetite and believe in the economic reform story of Egypt and that the Egyptian companies will perform much better, given economic developments and prospective growth—is [addressing] a significant issue associated with trading volumes and the capacity for them to enter the market to buy the required stakes or positions in these companies. So, one of the main pillars we are focusing on is creating an active trading environment, and there is no magic when it comes to this area. However, there are incremental, small reforms that will eventually lead to the target we are aiming for.

The cover of Business Today with the picture of Chairman of EGX Mohamed Farid

What are the steps that have been taken so far on this regards?

Firstly, the EGX Board of Directors decided to reduce suspension of trading time from 30 minutes to 15 minutes, after conducting several studies on international markets and crunching in the numbers.

This was one of the key factors that contributed to the pushing of trading aggregates during the period following the decision, to a daily aver-age of LE 1.2 billion from LE 700 million. Then, we adjusted some of the trading rules to amend the bases of calculating suspension limits of trading levels and price limits during the trading session in which the cash dividends distribution is announced, because when dividends are distributed the price increases, but this does not mean there is a change in the price.

Furthermore, we introduced the margin trading of Exchange Traded Funds (ETFs) after its approval by the regulator in order to attract investors to trade at lower risk and cost. The ETFs constituent companies are already traded with the margin mechanism; thus, the EGX submitted a proposal to the FRA after examining several international experiences to add the ETFs within the securities allowed to margin by 100% and same-day trading. The FRA approved allowing an 80% margin to be traded according to the margin mechanism.

We proposed the short-selling mechanism, and we are done with the technical requirements of trading and exchange mechanisms. We are waiting for the final regulatory amendments and approval to activate the mechanism.

This tool was expected to be activated by the end of 2017; why was it suspended and to what extent will it help increase the trading volume?

We cannot quantify specifically, but international studies showed that short selling would increase trading volume between 20% and 25% in general.

We have fulfilled all the mechanism’s requirements are awaiting the regulator’s approval. We introduced some of the amendments to the Market Maker Activity and basically reviewed the regulatory frame that was out since 2007. We have also studied international markets and all the requirements that should come from the EGX, before we sent the study in its entirety to the regulator to take its time and study the aspect.

What have you done so far to activate sukuk trading in the EGX?

The regulatory framework is out, which is good, however, it is demand-driven and we do not have a further role [to play] other than the sukuk listing and sharing.

It seems to be a busy year for the EGX, with the government announcing its state-IPOs’ program and other private enterprises revealing plans to float shares. How will you prepare the market for the upcoming activities?

Usually, when you have sufficient supply, you would have sufficient demand from your clientele as long as your macroeconomic setup is quite stable. That is an important factor to put into consideration. Also, among the 23 state-owned companies announced by the Finance Ministry, there are 9 already listed in the EGX that have their stocks floated in the market.

What we are always trying to do is improve the trading and the disclosures’ requirements. Other aspects that we are working include improving the risk management within the brokerage companies…this is one of the aspects that we will be working hard on in the coming period.

Also, bear in mind that ultimately, big-portfolio investors are always looking at big IPOs, and hence the size of the IPO is a very significant factor. Investors have always expressed their desire to increase their investments in the market, but they complained of insufficient paperwork or listed companies. So, rest assured that when you offer sufficient supply, you will have sufficient demand arising on the other hand, given the amount of promotions that have been conducted during the past seven or eight months and the economic reforms.

What is your plan regarding promoting public awareness of the stock market?

This area is very important, as the financial literacy aspect is quite limited in Egypt. We are promoting the aspects of investment in the stock market amongst various companies. Whenever we have dealings with business associations, we do not solely meet with top management; we invite the employees as well to make them aware of the trading environment and the financial tools available for them.

We have not done public campaigns yet because it is better to first target educational material, and once you achieve this aspect, you can move to the second level of campaigns.

We also regularly deal with most of the Egyptian universities and youth centers on stock market simulation programs.

So, we are following a targeted approach, but it is not only the EGX’s role to promote for the mar-ket; it is also the role of those whose bread and butter are dependent on the market. Brokerage companies have to play a role in this area.

Additionally, we will revamp the EGX’s electronic website to better express the market and the development of indices’ performance with the aim of providing diversified services for the market’s clientele locally and internationally. This update will also include an educational section aimed at raising financial awareness, which would help lure new categories of traders, eventually [leading to] increased liquidity and further deepening the market to make it more efficient.

Chairman of EGX Mohamed Farid- Business Today/Mohsen Allam

When is the website expected to launch after this update?

Hopefully, it will be accomplished and launched by the second quarter of 2018.

Can we see media companies listed on the EGX at some point in the near future?

The media industry in Egypt is a promising industry and we look at the sector as a strategic one. The EGX is open to deal with the entire economic sector, including the media industry. We haven’t received official proposals for listing these companies, however.

How can you help such companies enlist on the bourse?

We organize promotional campaigns and meet different companies to explain listing rules and procedures as well as the advantages of being a listed company, including widening the ownership base, securing competitive financing and branding their trademark and attracting foreign investment in their enterprises.